Do I need a discretionary family trust?

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Do I need a discretionary family trust?

What is a family trust?

A family trust is a discretionary trust set up to hold the assets of a family or to run a family business. No two discretionary family trusts are the same, yet there are two overarching benefits in establishing and administering any family trust. These are:

  1. The protection of assets; and
  2. The efficient distribution of income.

Who and what is involved in a family trust?

  • Settlor: sets up the trust and thereafter has no involvement.
  • Trustee: the legal owner of the trust property who decides how to manage the assets in the interests of the beneficiaries.
  • Appointer: holds the power to remove and nominate trustees when a trustee passes away or can no longer manage the trust.
  • Beneficiaries: family members who benefit from the trust but have no legal ownership of the property.
  • Trust deed: legal document that creates the trust establishing its objectives and identifying the trustee and beneficiaries.

What are its advantages?

  • Protection of assets: individuals can hold onto their assets without being the legal owner of them thus protecting them from pursuit by a creditor.
  • Tax advantages: beneficiaries pay tax on their individual share of the trust’s net income.

What are its disadvantages?

  • Cost: the set up and administration of a trust can be quite costly.
  • Trustee’s liability: as the legal owner trustees are personally liable for trust debts incurred. This liability can be reduced by appointing a company as trustee rather than an individual.
  • Investment: investors prefer company structures over trusts thus creating a barrier to growth for a business run through a trust.

You should always seek legal advice before proceeding with a discretionary family trust.